The Best Reason To Buy ARM Holdings plc

Shares in ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) have been one of the best buys of the century so far. The price has more then seven-bagged over the past five years and is up more than twelve-fold over a decade — and compared to that, the FTSE 100 looks like what you don’t want to see on a heart monitor.

But despite that stunning rise, ARM shares are cheaper now than they have been for a few years. With a price of 986p, we’re looking at a forward P/E of 42 for this year, dropping to 35 based on 2015…

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Shares in ARM Holdings(LSE: ARM) (NASDAQ: ARMH.US) have been one of the best buys of the century so far. The price has more then seven-bagged over the past five years and is up more than twelve-fold over a decade — and compared to that, the FTSE 100 looks like what you don’t want to see on a heart monitor.

But despite that stunning rise, ARM shares are cheaper now than they have been for a few years. With a price of 986p, we’re looking at a forward P/E of 42 for this year, dropping to 35 based on 2015 forecasts. That’s a good bit above the FTSE average, but it’s the lowest since 2009 for ARM.

I reckon there’s a number of good reasons to consider buying ARM shares.

Earnings growth

For one thing, the company has posted double-digit earnings growth for four years in a row, with two more years currently forecast — and nobody is really expecting to see the end of it any time soon.

In fact, ARM’s pre-tax profit for the year ended December 2013 came to £162.6m. That was almost three and a half times the 2009 figure of £47.3m, even after a rare dip from 2012. Forecasts for 2014 and 2015 suggest pre-tax profit figures of £394m and £487m respectively — by 2015, that 2009 figure could have multiplied more than ten-fold!

What dividend?

Another thing I like, though you might think I’m crazy, is ARM’s dividend. Sure, it only yielded 0.5% last year, and is only expected to reach 0.8% by 2015.

But the point is it’s rising strongly — last year it was boosted 27% to 5.7p per share, and that followed on from a 29% rise the year before and 20% the year before. Forecasts suggest a further 17% this year and 23% next year. And if there’s one thing I love, it’s a dividend yield that is seriously outstripping inflation and then some.

It’s sobering to think that should ARM’s share price suddenly crash to the FTSE 100 long-term average of 14 with no change to ARM’s fundamentals, its predicted 2014 dividend would provide a 2% yield, rising to 2.5% in 2015. That’s still not massive, but it shows that ARM is already at the stage of boosting its mature long-term dividend characteristics — and when it does eventually go ex-growth at some far-ahead time, it should still hopefully be a nice investment.

Insatiable demand

But what really makes me think ARM is a good buy is the thing that underpins all of the above. It’s the year-on-year growth in demand for the things its sells — its chip designs.

In Q4 2013, ARM saw 2.9 billion (yes, billion) chips shipped just in the quarter, for a 16% rise on the same quarter the previous year. And the fastest growth was in lower-cost devices for entry-level mobile phones, microcontrollers and smart sensors — booming segments of the semiconductor market. Wearable devices, the “Internet of things”, and all that kind of stuff reminds us yet again that these are still early days in the demand for processing power.

The first and second quarters of this year saw 2.9bn and 2.7bn chips shipped, but with sales typically biased towards the second half of the year they represented rises of 11% on the equivalent quarters of last year.

A company with many years of growth left in it, then — unless you think all that internet stuff is going to stop.

Where is the smart cash going?

If you'd bought ARM shares over the past decade you'd have been very smart indeed. But where are the leading lights of the investing world actually putting their money today? Take a look at where TMF's top writers think The Smart Money Is Going by getting a copy of their latest hot report.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended shares in ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.